Capability, Promote Strategy, and Culture

In this lecture, we focus

• Strategy for Cash Hog and Cash Cow

businesses

• Superior Efficiency

1
 Capability, Promote Strategy, and Culture
Cash Hog and Cash Cow Business
o A cash hog business is one whose internal
cash generations/flows are inadequate to fully
fund its needs for working capital and new
capital investment
o A cash cow business is a valuable part of a
diversified company’s business, because it
generates surplus cash for financing new
acquisitions, funding capital requirements of
cash hogs

2
 Capability, Promote Strategy, and Culture

Cash Hog and Cash Cow Business

o Corporate management has to decide whether
it is worth financially and strategically to
invest in cash hogs
o Surplus fund from cash cows can be invested
in promising cash hogs
o Cash hogs in low industry attractiveness or a
weak competitive position can be abandoned

3
 Achieving Superior Efficiency
• Economies of scale
– Unit cost reductions associated with a large scale of
output
• Ability to spread fixed costs over a large production volume
• Ability of companies producing in large volumes to achieve a
greater division of labor and specialization
• Diseconomies of scale
– Unit cost increases associated with a large scale of
output
• May happen due to additional investment required for
additional output
• Suppose a developer can build 5 apartment buildings at a
time using its present resources and capability. But if it goes
for 7 apartments, it has to buy huge machineries.
4
Economies and Diseconomies of Scale

5
 Achieving Superior Efficiency
• Learning effects

– Cost savings that come from learning by doing

• Labor productivity
• Management efficiency

• When changes occur in a company’s

production system, learning has to begin
again
6
Impact of Learning and Scale Economies

7
 Achieving Superior Efficiency

• The experience curve

– The systematic lowering of the cost structure

and consequent unit cost reductions that
occur over the life of a product
• Economies of scale and learning effects underlie
the experience curve

8
The Experience Curve

9
 Achieving Superior Efficiency
• Dangers of complacency with the experience
curve
– It will bottom out
– New technologies can make experience effects
obsolete
– Some technologies may not produce lower costs
with higher volumes of output
– Flexible manufacturing technologies may allow
small manufacturers to product at low unit costs

10
 Organizational Capability
Achieving Superior Efficiency

• Marketing

– Marketing strategy: pricing, promotion,

advertising, product design, distribution
– Reducing customer defection rates and
building customer loyalty

11
 Organizational Capability
Achieving Superior Efficiency

• Materials management

– Getting inputs and components to a production

facility, through the production process, and out
through a distribution system to the end user
– Just-in-time (JIT) inventory system
– Supply chain management

12
 Organizational Capability
Achieving Superior Efficiency

• R&D strategy

– Designing products that are easy to

manufacture
– Process innovations

13
 Organizational Capability
Achieving Superior Efficiency

• Human resource strategy: employee

productivity

– Hiring
– Training
– Self-Managing Teams
– Pay for Performance

14
 Organizational Capability
Achieving Superior Efficiency

• Information systems and the Internet

– Automating interactions between
• Company and customers
• Company and suppliers

• Infrastructure
– Company structure, culture, style of strategic
leadership, and control system determine context
of all value creation activities 15
 Organizational Capability
Achieving Superior Quality

• Attaining superior reliability

– Total quality management (TQM)

• Improved quality means that costs decrease
• As a result, productivity improves
• Better quality leads to higher market share and allows
increased prices
• This increases profitability
• More jobs are created
16
 Value and Culture
• Management is obligated to manage
organization in such a way that employees
will have the opportunity to earn according to
their productivity.
• Employees should be able to feel confident
that if they do their jobs properly, they will
have a job tomorrow.
• Employees have the right to be treated fairly
and must believe that they will be.
• Employees must have an avenue of appeal
when they believe they are being treated
unfairly. 17